Overview

• The $30 billion in deposits that First Republic reported it will receive from 11 large U.S. banks should ease near-term liquidity pressures, but it may not solve the substantial business, liquidity, funding, and profitability challenges that we believe the bank is now likely facing.
• Based on the company's public disclosure on March 16 that secured borrowings from the Federal Reserve have ranged from $20 billion to $109 billion and borrowings from the Federal Home Loan Bank increased by $10 billion over the last week, we think that the outstanding balance of secured borrowings has likely increased significantly to fund sharp deposit outflows that had occurred. The company's March 16 report also noted that daily deposit outflows have slowed considerably.
• We lowered our long-term issuer credit rating on First Republic to 'B+' from 'BB+'.
• The rating remains on CreditWatch negative, indicating we could lower the rating further if the bank is unable to demonstrate some progress in stabilizing deposits and recovering the franchise value that, in our view, have likely eroded.

Rating Action

On March 19, 2023, S&P Global Ratings lowered its long-term issuer credit rating on First Republic Bank to 'B+' from 'BB+'. We also lowered our senior unsecured issue rating to 'B+', our subordinated issue rating to 'B-', and our preferred stock issue rating to 'CCC'. The ratings remain on CreditWatch with negative implications.

Rationale

The $30 billion in deposits that First Republic reported it will receive from 11 large U.S. banks should ease immediate liquidity pressures, but we think the business faces substantial long-term challenges. The deposit infusion from 11 U.S. banks, the company's disclosure that borrowings from the Fed range from $20 billion to $109 billion and borrowings from the Federal Home Loan Bank (FHLB) increased by $10 billion, and the suspension of its common stock dividend collectively lead us to the view that the bank was likely under high liquidity stress with substantial deposit outflows over the past week. As of March 15, First Republic reported a cash position of $34 billion, not including the $30 billion it will receive in deposits from the 11 banks.

We think this level of on-balance-sheet cash and the inflow of deposits from other banks should give First Republic additional liquidity to fund further deposit outflows, which the company reported have slowed considerably, and help the bank pay down a portion of its high-cost wholesale borrowings. Nonetheless, we do not view this deposit infusion--which has an initial maturity of 120 days--as a longer-term solution to the bank's funding issues. In addition, we think attracting meaningful deposits will be difficult, constraining the bank's business position.

First Republic tapped higher-cost secured funding extensively over the last week--likely, in our view, to fund deposit outflows. Per its public filing on March 16, First Republic Bank availed itself of the borrowing capacity made available by the Federal Reserve and FHLB over the last week. In our view, First Republic's disclosure regarding the borrowings range is an indication to us that it likely drew on its available borrowing sources to fund significant deposit outflows--most likely, we think, from customers with balances over the Federal Deposit Insurance Corp.-insurance limit.

The bank reported borrowings from the Fed at an overnight rate of 4.75% from March 10 to March 15, and at a rate of 5.09% for increased short-term borrowings from the FHLB. Our assessment of the March 16 public filing is that First Republic likely has significantly encumbered its balance sheet to obtain the Federal Reserve and FHLB borrowings, using up much of its financial flexibility and leading to the multibank deposit infusion announced on March 16. In our view, the limited financial flexibility suggested by such a borrowing profile could make it difficult to fund additional loans with deposits, further hurting its business prospects.

We think continuing use of secured borrowings will have a material negative impact on earnings and leaves First Republic's funding profile more sensitive to market risks.  In its public filing, the bank announced that it is focused on reducing its borrowings and evaluating the composition of its balance sheet. Fixed-rate mortgages with long maturities make up most of its loans, and its yield on earning assets was about 3.5% in the fourth quarter of 2022. If the bank needs to maintain significant levels of secured borrowings at the current rates, we expect net interest income will decline substantially and impair profitability. (Less than 20% of the bank's operating revenues have been from fee income.) In addition, if market rates were to increase further, we expect the significant repricing mismatch between loans and short-term wholesale borrowings would lead to further earnings deterioration. In this scenario, the ability to build capital through earnings could be further impeded, in our view.

CreditWatch

The CreditWatch negative reflects the potential for First Republic's creditworthiness to deteriorate further because of weakening business stability and a high level of ongoing stress to funding and liquidity.

We could lower our ratings on First Republic, potentially by several notches, if:

• The bank is unable to make progress in recovering some lost deposits, or it continues to see deposit outflows;
• High-cost wholesale borrowing balances remain elevated and erode profitability to the point of sustained negative earnings; or
• Other financial or operational issues arise because of elevated market risk.

We could resolve the CreditWatch without lowering the rating if:

• Secured borrowings decline, likely driven by a recovery in customer deposits, and remain lower for an extended period of time, leading us to view the bank to be at least modestly profitable; and
• The bank makes meaningful progress in rebuilding its deposit base with traditional core business and consumer deposits.

Environmental, Social, And Governance

ESG credit indicators: To E-2, S-2, G-4; From E-2, S-2, G-3 We see governance factors as a negative consideration, affecting more than one analytical component, in our analysis of First Republic. The high deposit volatility in the wake of recent bank failures has significantly intensified vulnerabilities within First Republic's operating model. Nonetheless, we view the deposit infusion as an action to stem liquidity pressures.

Ratings Score Snapshot

Environmental, social, and governance (ESG) credit factors for this change in credit rating/outlook and/or CreditWatch status: 

• Risk management, culture, and oversight

Related Criteria

• General Criteria: Hybrid Capital: Methodology And Assumptions, March 2, 2022
• Criteria | Financial Institutions | Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Dec. 9, 2021
• Criteria | Financial Institutions | General: Financial Institutions Rating Methodology, Dec. 9, 2021
• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July 20, 2017
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

• First Republic Bank Downgraded To 'BB+' From 'A-' On Funding Profile Risk; Ratings On CreditWatch Negative, March 15, 2023

Ratings List